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Thread: Personal Tax on Investment Interest

  1. #1
    Junior Member Vixremento's Avatar
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    Personal Tax on Investment Interest

    Hi All

    I have a few questions that I thought I'd ask here before I speak to a financial manager.

    First, I have a money market and a 32-day fixed deposit that have both grown quite nicely up to the point now where the tax man comes along to eat away at me more and more annually. In addition I also have an endowment that has reached maturity so I'm a little stuck as to what I should do with my investments to get the best return without having to pay quite so much tax.

    The main question I'm asking here is what is the most tax efficient way to investment my money? I've almost capped my Tax Free Savings account, my house is paid for so I can't pump extra money into my bond and I also have no other debt other than the run of the mill kinda stuff required to live from month to month (cell phone, internet, etc.).

    Should I consider purchasing a second property or perhaps putting my money into some kind of alternate investment (a personal pension/provident fund of some kind) that will be less painful currently when adding the interest earned on top of my annual salary to push my tax up so high? I also have an active RA which I guess I could potentially push more money into but I'm not sure if it's the wisest thing to do.

    Any suggestions or advice that you can offer would be greatly appreciated.

  2. #2
    Email problem Rafael's Avatar
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    Good day

    I would not put any money into a money market or 32 day fixed deposit, the returns do not justify it even before fees erode the investments.
    If you get a return of 5% back from Money market, and inflation is 6%, then your investment value is already losing 1% every year before fees.

    An Endowment is not a bad product but the fees are high and it is taxed within the fund at a high rate. The great feature of an endowment is that from last year if you have an endowment that has been active for longer that 3 years, it cannot be attached by creditors. (Great if you a business owner)

    Quote Originally Posted by Vixremento View Post
    perhaps putting my money into some kind of alternate investment (a personal pension/provident fund of some kind) that will be less painful currently when adding the interest earned on top of my annual salary to push my tax up so high? I also have an active RA which I guess I could potentially push more money into but I'm not sure if it's the wisest thing to do.
    I would not invest additional money into a provident/pension or retirement.
    If you invest into your RA, you locking money away until age 55, then at retirement you only allowed to take one third as a lump sum (R500 000 tax free) while two thirds must be invested into an annuity (monthly annuity is also taxed).
    By investing into a pension or provident fund, you are allowed one withdrawal before retirement but you are taxed on the withdrawal (first R25 000 tax free)

    I'm not sure how old you are but if you need to look at creating liquidity and growing your wealth.
    You have almost capped your tax free savings account, I believe this tax free savings account should be utilized for enhancing your retirement income at retirement and assist with any unexpected expenses at retirement (the funds will remain in the tax free fund and you can withdraw whenever you need)

    I deal with STANLIB so If I was in your situation I would look at a STANLIB Classic Investment, and you should negotiate with you adviser to bring down his fees. The total fees should be lower than 1.9% per annum.
    You can look at a unit trust too.

    One thing I do for all my clients is show them my investment portfolio, as I wouldn't investment my clients in any products that I would not go into. Sometimes you are invested into products that remunerates the adviser most. So dont be shy to ask you broker to show you where his money is invested.

    I had two properties which I have now sold, I just had hassle with them as some Tenants really ended up destroying the place, and even though you have an asset that appreciates in value, I believe the property market opportunity has slowed down considerably. I didn't really make a lot of profit due to fees.

    Hope you find the above helpful
    You miss 100% of the chances you never take

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    Junior Member Vixremento's Avatar
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    Quote Originally Posted by Rafael View Post
    Good day

    I would not put any money into a money market or 32 day fixed deposit, the returns do not justify it even before fees erode the investments.
    If you get a return of 5% back from Money market, and inflation is 6%, then your investment value is already losing 1% every year before fees.

    An Endowment is not a bad product but the fees are high and it is taxed within the fund at a high rate. The great feature of an endowment is that from last year if you have an endowment that has been active for longer that 3 years, it cannot be attached by creditors. (Great if you a business owner)



    I would not invest additional money into a provident/pension or retirement.
    If you invest into your RA, you locking money away until age 55, then at retirement you only allowed to take one third as a lump sum (R500 000 tax free) while two thirds must be invested into an annuity (monthly annuity is also taxed).
    By investing into a pension or provident fund, you are allowed one withdrawal before retirement but you are taxed on the withdrawal (first R25 000 tax free)

    I'm not sure how old you are but if you need to look at creating liquidity and growing your wealth.
    You have almost capped your tax free savings account, I believe this tax free savings account should be utilized for enhancing your retirement income at retirement and assist with any unexpected expenses at retirement (the funds will remain in the tax free fund and you can withdraw whenever you need)

    I deal with STANLIB so If I was in your situation I would look at a STANLIB Classic Investment, and you should negotiate with you adviser to bring down his fees. The total fees should be lower than 1.9% per annum.
    You can look at a unit trust too.

    One thing I do for all my clients is show them my investment portfolio, as I wouldn't investment my clients in any products that I would not go into. Sometimes you are invested into products that remunerates the adviser most. So dont be shy to ask you broker to show you where his money is invested.

    I had two properties which I have now sold, I just had hassle with them as some Tenants really ended up destroying the place, and even though you have an asset that appreciates in value, I believe the property market opportunity has slowed down considerably. I didn't really make a lot of profit due to fees.

    Hope you find the above helpful
    Thanks Rafael, just the sort of guidance that I'm looking for.
    I would not put any money into a money market or 32 day fixed deposit, the returns do not justify it even before fees erode the investments.
    If you get a return of 5% back from Money market, and inflation is 6%, then your investment value is already losing 1% every year before fees.
    I initially started with the money market to keep my cash safe for a rainy day (after having spread out some money into some other investments) as I didn't want to get stuck in the situation without having access to some emergency money and I guess it kinda grew from there where I then pushed money into the fixed deposit because of higher interest rates. You're right though - these could be earning a lot more in another product but the basic idea was to keep them safe, guaranteed and easily accessible.

    Will look into the STANLIB Classic Investment - just always worried about the safety of my money in the long term though (I'm already losing to SARS lol).

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    Gold Member Houses4Rent's Avatar
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    I would not invest in any paper assets unless its just a short term emergecy kitty. Basically you hand over your cash to someone else. They will live nicely off it, but if the projections do not work out and you lose its your problem, not theirs. More than 95% cannot retire financially independent. I am of the firm believe that this is because of the bulk of people invests in paper assets. If you want to be successful you have to do something what the bulk does not do - swim against the stream so to say.

    Savings accounts are useless as pretty much all of them are below inflation. So you loose and the bank wins.

    I invest all in residential (global) property mostly in a trust and never sell. I will retire one day from my PASSIVE rental income. Since I never sell I will never have to pay Capital Gains Tax either. I manage 130 properties for my sins and never really had any tenant seriously trash a place.

    This is a generic feedback of course as we have little insights to your specific situation, but I do above and am most certainly not going to be one of the 95%.
    Houses4Rent
    "We treat your investment as we treat our own"
    marc@houses4rent.co.za www.houses4rent.co.za
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    Global Residential Property Investor / Specialized Letting Agent & Property Manager

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  7. #5
    Email problem Rafael's Avatar
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    Quote Originally Posted by Houses4Rent View Post
    More than 95% cannot retire financially independent. I am of the firm believe that this is because of the bulk of people invests in paper assets. If you want to be successful you have to do something what the bulk does not do - swim against the stream so to say.
    I believe that the reason why 95% do not retire financially independent is because most people do not save or they leave it for too late.
    I see many South Africans living in a R900 000 houses driving a R500 000 car. Most people tend to try keep up with appearances. I see many clients leave their company and withdraw their full pension/provident fund losing 10 years or more worth of investing. I have clients that are 45 investing R500 into their retirement and not wanting to increase it, yet they pay R5 000 a month for their short-term and R8000 for a car that they will never keep because every 3-4 years it is being replaced and R500 a month for the latest Iphone.

    Not all of the 95% of people can qualify for a bond. If I earned R15 000 per month, how much of a bond would i be able to afford and if my tenant missed one month if would put immense pressure on me. The best way for me to create liquidity and retire is to invest in "paper assets" if I was earning R15 000 per month

    According to Credit Suisse, South Africa’s middle and upper class accounts for 14.6% of the total adult population. Of this, the middle class comprises 13.7%, showing that approximately 10% of the the country’s 1% are actually considered upper middle class.

    The lower boundary to South Africa’s middle class is a net worth of R306,160, the middle class holds 38% of total wealth in the country, giving an average net worth of just R825,200.

    Stats SA data on monthly income in South Africa in 2010 shows that anyone earning a salary higher than R22,840 per month would be in the top 5% of earners in the country.

    You have to clear R560,000 after tax to be considered top 1% in the country,This equates to a pre-tax salary around R800,000 a year

    Quote Originally Posted by Houses4Rent View Post
    More than 95% cannot retire financially independent. I am of the firm believe that this is because of the bulk of people invests in paper assets.
    Based on the above mentioned I believe it is not because the bulk of the 95% invests in paper assets, but because they hardly invest, but this my opinion

    I do believe in is good to have a balance of both.
    You miss 100% of the chances you never take

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    Gold Member Houses4Rent's Avatar
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    Yes, as I said I was generalising. There are plenty of reasons for the 95%. The biggest bummer is probably the lack of financial education (a global problem) and the status thinking. The bulk thinks if they save in these paper assets and see all the zeros in the projected amounts they feel rich. However, nobody really tells them about the compound affect of inflation and that these projections are usually a bit on the optimistic performace side (my feeling).
    The basic principle is flawed. To handover the cashto some else and assume this other party looks first after them and not themselves.
    But of course not many have the invling and understanding to take chage of their financial future and its so much easier to hand that over.

    I one inveted a lot in RA's, because I did not know better. Then came Rob Rusconi and blew the whistle about how they really (used to) work and I stopped it all. Since then I invest all in global entry level residential property investment and ar much better off. I basically send my tenant to work to pay my asset off. How much better can it get?

    For the low income earners there is help too in form of FLISP and rent-to-buy or siilar schemes which are mostly unknown.
    Houses4Rent
    "We treat your investment as we treat our own"
    marc@houses4rent.co.za www.houses4rent.co.za
    083-3115551
    Global Residential Property Investor / Specialized Letting Agent & Property Manager

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